Decoupling or business as usual? How Japanese multinational corporations adapt to political risk in China

Abstract How are multinational firms (MNCs) and the global supply chains that link them to China adjusting to heightened political risks? Since the US–China Trade War, COVID-19 supply chain shocks, and the Russian invasion of Ukraine, Western governments have increased efforts to encourage MNCs to divert investment from an increasingly authoritarian China toward politically reliable allies and partners. Using firm-level data on Japanese MNCs from 2012–22, we examine competing predictions from “business as usual” and “follow the flag” theories. We introduce a typology of de-risking strategies: decoupling (exit from China), diversifying (investment outside China), and diverting (both exit from China and investment in friendly countries), contrasted with inaction. While most Japanese MNCs continue to operate in China, a majority have adopted at least one de-risking strategy over the past decade. Consistent with the “following the flag” theory, we find that national security-relevant MNCs are significantly more likely to engage in all de-risking strategies after controlling for firm size, experience, and China exposure.